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How firms use transfer prices strategically, Role of GAAP

1) How can firms use transfer prices strategically? What role does GAAP play in how firms determine transfer prices?

2) Consider the following information about a potential project:

Investment required $2,000,000
Expected annual project revenue $3,600,000
Expected annual project expenses $3,200,000
Required rate of return 12%
Current division return on investment 18%

d) Perform DuPont Analysis on this project.

e) What is the project's residual income?

Solution Preview

1) How can firms use transfer prices strategically? What role does GAAP play in how firms determine transfer prices?

Firms use transfer prices strategically by setting the prices to give incentives to the optimize output and after-tax profits. For instance, transfer prices may be set to have higher costs in high tax locations and lower costs in low tax locations to minimize tax expenses. Transfer prices may be ...

Solution Summary

Your tutorial gives two strategic ways to use transfer prices and explains the role of GAAP. The ratios and formulas are given and the computation are in Excel for your study.

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